InvenSense's Massive Upside Potential

Though trading near its 52-week high, InvenSense (NYSE: INVN  )  has tremendous upside potential and is well worth the buy. The company recently settled litigation with STMicroelectronics (NYSE: STM  ) and is consequently poised to see great growth. Despite the fact that most of the terms of this settlement are being kept secret, what has been disclosed implies that InvenSense will see a significant increase in revenue and innovation over the coming years, creating an upside that may lead to more profits and even a potential acquisition.


source: InvenSense

EPS increase
In the Q&A portion of its earnings call, InvenSense management stated that its projections included $3 million-$5 million in legal fees each quarter for the foreseeable future. Given an average net income of $13.5 million over the last four quarters, a $3 million-$5 million increase would add from 22%-37% to the company's bottom line. With 87.46 million shares outstanding, this would bring an extra $0.13-$0.22 of EPS each year.

IP expansion
One of the only other parts of the settlement revealed was a cross-licensing agreement. The agreement dictates that, among other patents, STMicro is allowed to freely use InvenSense's proprietary manufacturing process, which will help the company reduce production costs. Conversely, InvenSense can now use IP from any of STMicro's near 1,000 patents, freeing up the company's ability to produce cutting edge technology. With the dawn of "wearables," this could put the already well-positioned InvenSense in an even better spot to grow.

Wearable tech
Currently, InvenSense is leading the way in wearable technology. Microchips made by the company have already been built into Google (NASDAQ: GOOGL  ) Glass and Samsung's (NASDAQOTH: SSNLF  ) Galaxy Gear Smart Watch. With its recent introduction of the SoC, or System-on-Chip, InvenSense has created a way for mobile devices to do environmental monitoring without using the main processor. In other words, this chip saves quite a bit of battery power. This technology was made possible through the acquisition of Analog Devices' microphone unit, which serves to add to InvenSense's impressive IP portfolio.

Over the next few years, the wearable device market is expected to explode. According to Juniper, by 2018 the industry will be worth $19 billion, up from $1.4 billion this year. As this explosion occurs, InvenSense can expect revenue to grow substantially and its patent portfolio to become increasingly valuable. As such, it may become a perfect acquisition target.

Who might buy?
The conversation is made very interesting by the fact that Samsung is indicating it may wage a bit of a patent war. Consider the following: First, the company signed a 10-year cross-licensing agreement with Google, giving both companies access to the entire patent portfolio of the other . Similarly, Samsung made what is effectively the same deal with Cisco. Rumor has it that these deals are the first of several that will enable the newly forming alliance to fight the Rockstar Consortium, a group whose members include Apple, Microsoft, BlackBerry, Ericsson, and Sony. If this battle escalates, InvenSense's portfolio would be something either side would want to add to their patent arsenal. Even if a stand-off does not ensue, Google and Apple have already proven they are both willing to pay hefty sums of money for mobile patents.

There is another, rather unexpected possible buyer: Intel. The organization has long been attempting to break into the mobile market and has thus far failed to do so. During this year's Consumer Electronics Show, Intel delivered a key note speech that focused almost entirely on wearable devices, indicating a shift away from the smartphone and tablet market and toward what is perceived to be the future of tech. Intel may be very interested in giving itself a competitive advantage in the emerging wearable device market through the purchase of InvenSense's patent portfolio.

The bottom line
The bottom line is this: InvenSense's upside is huge. The company can now count on an extra $3 million-$5 million per quarter, can leverage almost 1,000 new patents, and can expect revenue to grow as the wearable device market starts to explode. Further, as its patents become more valuable, InvenSense may become a prime acquisition target for companies looking to take advantage of emerging product trends. My suggestion: buy some shares of InvenSense while they're still cheap.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2014, at 8:08 PM, Cobra79 wrote:

    I believe the $3-$5 million will impact GAAP numbers only as legal expenses are not included in NON-GAAP numbers. Still this is significant as it does represent $12 - 20 million in cash that stays in the company. Also I am not clear as to the extent of the cross licensing deal and exactly who gets to license what in the deal. Has this been clearly spelled out anywhere?? Still the upside in wearable appears to be huge.

  • Report this Comment On February 13, 2014, at 5:51 PM, Bassdrone wrote:

    WIth todays revelation of a $15m payment to $STM and subsequent sell-off, what is the authors view ?

    The extra $3-$5m per quarter in reduced legal fees is somewhat negated, at least from a cash flow perspective, for FY'14. I feel the bigger picture is still the same and that this will flush out but how does it impact PPS in the short term ?

  • Report this Comment On February 19, 2014, at 2:31 PM, eddy8888 wrote:

    cross licensing agreement?? Does InvenSense have to pay any usage fees?Does STM? 30 % of the float is shorted for some reason. Good company if all they have to give up is the one time payment to STM. Until we know the extent of the agreement am a worried owner of this stock.

  • Report this Comment On February 19, 2014, at 6:03 PM, mjtri wrote:

    In addition to the legal savings (and the short term $15M payment), the positive impact to management focus is significant. The company seems to be executing quite well. Nice article.

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